The board of Steel Dynamics, Inc. (NASDAQ:STLD) has announced that the dividend on 11th of April will be increased to $0.50, which will be 8.7% higher than last year's payment of $0.46 which covered the same period. Despite this raise, the dividend yield of 1.4% is only a modest boost to shareholder returns.
View our latest analysis for Steel Dynamics
While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Based on the last payment, Steel Dynamics was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Over the next year, EPS is forecast to expand by 37.6%. Assuming the dividend continues along recent trends, we think the payout ratio could be 15% by next year, which is in a pretty sustainable range.
The company has a sustained record of paying dividends with very little fluctuation. Since 2015, the dividend has gone from $0.46 total annually to $1.84. This means that it has been growing its distributions at 15% per annum over that time. So, dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Steel Dynamics has seen EPS rising for the last five years, at 27% per annum. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.
In summary, while it's always good to see the dividend being raised, we don't think Steel Dynamics' payments are rock solid. While Steel Dynamics is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Steel Dynamics that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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